GOP split in battle over business tax breaks

Wednesday

Sep 13, 2017 at 12:58 PMSep 13, 2017 at 12:58 PM

Sean Sullivan, Mike Debonis and Damian Paletta The Washington Post

WASHINGTON - The White House and Republican tax negotiators are tangling over whether to offer new benefits to companies for buying things like equipment and software, a decision that could have huge implications for a range of U.S. companies.

House Republican leaders, including House Speaker Paul Ryan, R-Wis., and Ways and Means Committee Chairman Kevin Brady, R-Texas, want to change the tax code to allow companies to immediately deduct the cost of capital investments from their taxable income. Right now, companies are required to spread the tax benefit from these long-term investments over time.

But Senate Republicans have objected to this change, complaining of its potential cost. Some estimates have pegged the change at reducing tax revenue by between $800 billion and $2 trillion over 10 years.

House GOP tax writers agreed early in their planning for tax legislation that they wanted to allow aggressive deductions for business expenses. They believe this change would lead to a huge surge in new investment, resulting in a boom in economic growth. House Ways and Means Committee member Rep. Peter Roskam, R-Ill., was among those who said that allowing businesses to write off their investments immediately could be critical to helping boost the economy.

"It drives half of the growth," Roskam said in an interview.

Such a change could benefit manufacturers, which make large capital investments, while hammering financial and real estate companies, which use the benefits of interest deductibility as ways to secure finance deals.

But Senate GOP leaders have pushed back on this approach, worried about the impact on the government debt of both allowing immediate expensing and slashing tax rates, a premise that House Republicans largely reject.

"There's this false choice between rates versus expensing," Roskam said. "Anytime someone criticizes, and that's their purview, okay, then, what's their alternative? And how do you get growth? We're interested in hearing what is it you're actually for instead of all of the things you're against."

The fight surfaced at a meeting between White House officials and congressional Republicans last week, several people close to the talks said. A decision is expected to be made in the coming weeks so that House lawmakers can try to pass a bill through their chamber.

White House officials haven't outright dismissed the idea of allowing companies to immediately deduct the cost of these investments, for fear of rankling House Republicans, people briefed on the talks said. But the officials have stressed the desire to push the corporate tax rate as low as possible. The enormous cost of making the expensing change could make it very difficult to also reduce the tax rate without adding large amounts of money to the federal debt.

To offset the lost revenue, House Republicans have proposed eliminating or curbing the ability of companies to deduct interest payments on their debt from their taxable income. Many tax experts believe this change would be necessary because if companies are allowed to immediately deduct their capital investments and deduct the interest payments on their debt, they will end up paying no taxes at all.

If House Republicans accomplish this change, it would mark a huge shift in tax benefits away from companies that borrow money. Instead, it would create major new incentives for cash-rich firms that can make investments without having to rely on banks or debt markets.

It could strip away more than $1 trillion in tax benefits from companies that deduct interest on their debt and give those tax benefits to companies that make large, long-term capital investments.

A number of companies have formed a lobbying group fighting against curbing interest deductibility. The group, which calls itself the Businesses United for Interest and Loan Deductibility (or BUILD) Coalition, has argued that taking away this tax benefit would make it harder for certain businesses to finance investments, expand and create new products. Their members include the pharmaceutical firm Abbott, as well as agriculture, gambling, banking and housing firms.

The tax code already allows companies to deduct some investment costs, and there are specific carve-outs for certain investments that can be deducted immediately, such as certain drilling and film costs, according to Lily Batchelder, a former deputy director of the White House National Economic Council who also served as the top lawyer on the Senate Finance Committee when Democrats controlled the chamber.

The House plan would expand a temporary tax break known as "bonus depreciation" that allows companies to deduct between 30 and 50 percent of certain investments from their taxable income in the first year. The House Republican plan would expand this to the entire cost of the investment, while also making the benefit permanent.

In a joint statement in July, the White House and Republican leaders said their "goal" for the plan would allow for "unprecedented capital expensing," but they stopped short of jointly endorsing the House GOP plan.

Because of the impasse, lawmakers are looking at alternatives. They are discussing, among other things, allowing small businesses to use the immediate expensing benefit and perhaps expand it later.

Senate Finance Committee Chairman Orrin G. Hatch, R-Utah, wouldn't delve into details of the disagreements, saying, "I'm not going to get into those details at this time."

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The Washington Post's Kelsey Snell contributed to this report.

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